Educational Articles

Dow-30 Earnings: UnitedHealth Group - Third Quarter 2012

Erik M. Manning
| October 16, 2012

UnitedHealth Group (UNH - Free UnitedHealth Group Stock Repot), the largest U.S. health insurer and newest entrant into the Dow-30, did not disappoint in its first earnings release since being added to the index in late September. Dealing with the sweeping reform that is being thrust upon its industry and the choppy economic waters that all companies are navigating in these days, a stumble was not out of the realm of possibility. Still, UNH managed to post share net of $1.27, two pennies ahead of consensus, on revenues of $27.3 billion, which were in line with our call. This showing has been initially applauded by the market, as the stock climbed more than 2% in early trading.

On the heels of the stout third-quarter performance, UnitedHealth has boosted its earnings guidance for 2012 to a range of $5.20 to $5.25 a share. In turn, we've added $0.20 to our expectation, placing it at the apex of management's guidance zone.

For 2013, the consensus is now calling for share net of $5.60 on revenues of $119 billion. Still, we are taking a more cautious outlook due to the elevated uncertainty that will hover until the U.S. Presidential Election is in the rearview mirror (see below). For now, we are raising our top- and bottom-line targets to $118.5 billion and $5.50. Again, we will have much more clarity on these metrics within one month's time.

The number of customers on UNH medical plans has increased by 2.1 million, year over year. The largest increase came from government-funded Medicare plans for the elderly and Medicaid coverage for the poor. Most important for the company's earnings health, the share of customer premiums spent on care decreased even though rising employment tallies in the U.S. suggest that the economy is slowly heading in the right direction. Insurers often do better financially when their customers skip making trips to the doctor. Better employment on a large scale should translate to higher health costs, but nothing of that nature has materialized yet. Americans' low use of healthcare services has been a boon to this sector for about two years now, as claims costs have fallen and profits have risen.

For the third quarter, UNH stated that it spent 79% of its premiums on medical claims, a 170-basis-point dip from the same period of 2011. Using history as a guide, we can say that such an occurrence would appear to be probably on the horizon. However, we caution that the reform currently being enacted by the Obama Administration will place health insurers in uncharted territory, and the end result is still very much clouded at this juncture.

While referencing politics, it is necessary to point out that while quarterly earnings and overall performance remain vital to UNH, the upcoming election may well spark the largest move in its share price, since a victory for the Republican nominee, Mitt Romney, may lead to the reversal of some of the changes made under the Obama Administration, such as spending floors per account. This, in turn, may well enhance the profit potential of UNH and its peers.

For the most part, UnitedHealth Group has excelled over the past few years with little fanfare, but now that it has been selected as a Dow component, the spotlight on the company grows brighter. For example, its most recent acquisition, the purchase of Amil Participacoes SA, garnered quite a bit of attention. A little over a week ago, management disclosed that UNH would be acquiring the Brazilian insurer and hospital operator at a price tag of $4.9 billion. We think over time this deal will more than pay for itself, as Latin America's healthcare market is developing rapidly and presents a promising avenue for expansion.

This push, along with the company's Optum business, which provides services, such as health management and wellness programs, technology outsourcing, and pharmacy benefits, should provide a large portion of future growth. These operations have been performing admirably of late, with the exception of the pharmacy arm. Here, lower prescription volumes have hurt results.

From an investment standpoint there is a lot to like about UnitedHealth. Yes, many mutual funds that track the Dow Jones Industrial Average will now need to add positions in UNH, but the investment appeal here goes well beyond that. Cash flow and earnings are on the incline, which ought to provide UnitedHealth with the ability to expand as it sees fit, and may embolden management to further boost the already rising dividend. All told, total return potential out to 2015-2017 is handsome.

About The Company:UnitedHealth Group is a diversified health and wellbeing company. It offers products and services to more than 70 million individuals through two business segments: UnitedHealthcare (network-based health care benefits) and Optum (information andtechnology based health services).

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.